Economy & Politics

“An insignificant impact on the fund industry”

Lawyer Jacques Elvinger deciphers the tax measures announced by the government for SIFs investing in real estate located in Luxembourg.



Lawyer Jacques Elvinger deciphers the tax measures announced by the government for SIFs investing in real estate located in Luxembourg.

Jacques Elvinger, partner and head of the investment funds department at Elvinger Hoss Prussen, provides an update on the tax changes announced by the government. Among the novelties, the introduction of a tax on the income of funds holding Luxembourg real estate.

The government announced a tax on real estate funds. What changes concretely from the previous tax system?

Jacques Elvinger : “Certain investment funds will be taxed on the income from shares in Luxembourg real estate they hold. The new measure therefore does not concern those who own real estate abroad, for example. Moreover, the reform will not impact either funds that do not have real estate in their portfolio. This needs to be clarified, because it will ultimately lead us to the conclusion that there is no impact on the fund industry in general.

The measure will only impact a very small number of investment funds in Luxembourg.

anouk antony photo investment fund

To support the 21.7 billion euros of his budget proposal for next year, the Minister of Finance has decided to put an end to “tax abuse” relating to specialized real estate investment funds. Nice gesture but whose real impact is unknown.

Much has been said about specialized investment funds, SIFs, but other types of funds are involved as well. Namely, Part II funds open to the public and reserved alternative investment funds (FIAR) in which, as for SIFs, only informed investors can enter. But, I repeat, this only concerns these funds if they hold real estate in the Grand Duchy.

According to some sources, about 14% of SIFs qualify as real estate funds because they directly or indirectly own real estate, here or abroad. Of this 14%, there is only a very small part, in assets under management and in number, which is impacted by the new taxation. At this stage, we cannot quantify this part.

Jacques Elvinger

The Tax Administration will know this in two years, since all these funds will have to make, by May 31, 2022 at the latest, a declaration to the administration to confirm whether they hold Luxembourg real estate or not. “

What about funds that hold real estate through intermediary structures, for example?

The budget bill only targets investment funds that own real estate directly or through fiscally transparent entities. On the other hand, an SIF which holds Luxembourg real estate through an entity which is subject to taxation (such as a soparfi for example) is not affected by the new taxation as proposed. Because there is already taxation at the level of the intermediary entity.

It can be concluded that there is certainly a significant impact for the few investment funds that are affected by the new taxation. But overall, for all funds domiciled in Luxembourg, the impact will be insignificant.

What types of income are taxed?

“The bill provides that all income from real estate held in Luxembourg is taxed. It defines income as all gross rents and all capital gains made in the event of the sale of a building. The bill also ensures that taxation is independent of whether the fund holds real estate directly or through tax-transparent funds or entities.

Without going into details, the aim is to avoid the possibility of avoiding the tax by interposing other fiscally transparent funds or vehicles between the investment fund targeted by the bill and Luxembourg real estate. Similar tax regimes exist in other countries, including our neighboring countries.

What do you think of the 20% tax rate announced by the government?

“This rate seems to want to realign the taxation of real estate capital gains realized by an investment fund covered by the draft law with that applicable to a natural person in the event of the alienation of his property held directly or in the event of alienation of its shares in the company (soparfi or fiscally transparent company) which owns the Luxembourg building.

Indeed, in these latter cases, the long-term capital gain is subject to a maximum tax rate of 21% (corresponding to half of the marginal rate of 42%).

Illu - Finanzplatz - Place financiere - Luxembourg - Photo: Pierre Matge

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However, it should be noted that the bill does not seem to take into account the costs of obtaining for the determination of the taxable capital gain – which is clearly foreseen in the case of the taxation of a capital gain. carried out on the sale of a building held directly by a resident natural person.

Furthermore, with regard to rental income, it is the gross rent that is taken into consideration. There does not therefore appear to be any possibility of deducting costs, charges or depreciation, which is less favorable than direct holding by taxable persons other than funds.

The new tax measure has been touted as a “remedy” for tax injustices. What do you think?

“The SIFs, FIARs and Part II Funds are subject to the special tax regime of the subscription tax which is generally justified because the fund must remain fiscally neutral since there is potentially already taxation at the level of the investor who invests in the fund (in the investor’s country of origin) and at the level of the asset in which the fund invests (in the country where this asset is located) and the investment should not be penalized through a fund by compared to a direct investment.

Since the laws and regulations applicable to these funds legally allow them to invest in real estate, it is not surprising that some have used these structures to hold Luxembourg real estate.

If we now see that owning Luxembourg real estate in this way makes it possible to avoid taxation, it is not surprising either that an initiative has emerged to put an end to this possibility. This scheme has existed for years in accordance with the law. If it is now believed that it should be abolished, it is a political decision that must be taken into account.

What are the other advantages of a specialized investment fund?

“Recent discussions on SIFs suggest that there is only the beneficial tax aspect. But the FIS has other characteristics. First, it is supervised by the Financial Sector Supervisory Commission (CSSF). This provides increased protection for investors. The FIS must have a custodian bank, an administrative agent or a company auditor. Again with the aim of protecting investors.

Wi, Ranking of banks -Cssf CEO Claude Marx. Photo: Gerry Huberty / Luxemburger Wort

The Financial Sector Supervisory Commission (CSSF) presented on Tuesday a book and a documentary produced on the exercise of the Luxembourg supervisory authority since 1945.

All of these generate costs that do not exist in the case of direct ownership of real estate. From this point of view, there are not only advantages to using an FIS. It is difficult to determine the relationship between the costs of running an SIF on the one hand and the tax benefit on the other, it will probably depend on case to case. But it’s a fact that the tax advantage of SIFs was offset by much higher operating costs compared to owning a building directly. “


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